Q3 2021 Bottomline Technologies (DE) Inc Earnings Call
Greetings and welcome to the Bottomline technologies third quarter fiscal year 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation to queue up for a question you can press star one on your telephone keypad.
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Please note this conference is being recorded.
I will now turn the conference over to your host Daniel sheer General Counsel and thank you you may begin.
Welcome to the Bottomline and third quarter, 2020, one and earnings conference call I'm, Danielle share and I'm joined by Rob Eberle, Lee Bottomline, and CEO and Bruce Bode and our CFO.
On today's call will include forward looking statements about bottomline future expectations plans and prospects.
The statements are subject to risks uncertainties and assumptions, including those related to the impacts of COVID-19 on our business and and global economic conditions are.
Forward looking guidance is based on our assumptions and the macroeconomic environment day.
Many of these assumptions relate to matters beyond our control please.
Please refer to the cautionary language in today's earnings release and Bottomline is most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated and these forward looking statements.
We do not assume any obligation to update forward looking statements.
During this call Bottomline financial results are presented on a non-GAAP basis. These non-GAAP results include among others constant currency growth rates gross margins operating income EBITDA net income and earnings per share are.
A reconciliation of these non-GAAP financial measures and most directly comparable GAAP measures is available and the Investor resources section of our website and stuff.
Murray of the guidance provided during the call is available from the company. Upon request. So let me now turn it over to Rob for his remarks.
Good afternoon, and welcome to the Bottomline and third quarter of fiscal 'twenty, one earnings call.
And I'm here with Bruce Bowden, who has just joined this quarter as CFO and this is an excellent addition to the Bottomline team.
Bruce will provide a review of the quarter's financial results and our future outlook, and then Bruce and I and both be available for questions. Following his remarks.
Q3 was an important and very good quarter.
Driving subscription revenue growth is a central part of our strategic plan.
The highlight of the quarter was the acceleration of our subscription revenue growth.
Which also drove an acceleration on overall revenue growth.
We're delighted to see and reported the return of growth.
Behind our growth and the financial results we are presenting.
And at the core of our strategic plan.
And as an innovation agenda, responding and the most impactful market and competitive dynamics.
We successfully executed against that agenda and Q3.
Extending our product leadership and expanding our market opportunity.
I'll provide examples during my remarks.
First I'll briefly cover some of the key financial results for the third quarter.
Subscription revenue was $100 million, which was up 14% from a year ago.
And we of course pleased with the acceleration of our subscription growth and the quarter.
Subscription growth for the products not impacted by transaction volume was even stronger and <unk>.
21%.
Looking forward, while currencies moved against us a bit since January and we're confident we'll see continued acceleration and subscription growth and Q4.
Subscription bookings were $20 million.
Which is down about a $1 9 million from the prior quarter as we saw a couple of larger deals for digital banking and <unk> ex push outs.
We expect to see a step up in bookings and the fourth quarter.
EBITDA was $24 1 million for the corner.
Consistent with our plan and expectations and why.
And on track to achieve the 100 million and EBITDA, we committed for the year.
So excellent financial results overall for the quarter.
And while we're really pleased with the financial results. We're reporting we're even more excited by the opportunity ahead and the work we're doing to make the most of that opportunity.
Our innovation agenda is a central part of our strategic plan.
It's designed to address the fluid competitive dynamics of the markets, we compete and technology advancement, and particularly around data and analytics and machine learning and the acceleration of the digital transformation of business payments and its impact on our customers and target markets.
I'm going to highlight a few Belmont efforts currently underway with specific examples for payload ex.
Legal spend management.
Digital banking and the U K market.
Starting with paying out ex most critical factor behind scale market position and growth is vendor enrollment.
We've made the vendor experience and the technology capabilities from vendors a key priority for the payload ex network.
Solving business pain and reconciling payments.
Forecasting and receipt of funds and providing remittance detail and formats that allow for automated integration insurance, we're delivering critical value to vendors and payers alike.
The more value, we provide the vendors the faster the network and our revenues grow.
Continuing to deliver increased value to vendors has allowed us to grow the network to over 450000 vendors.
And that in turn.
And the network more valuable to payers and as they get greater automation and rebate and can achieve that faster the large and the vendor network.
For our legal spend management products and growing our market opportunity is a key objective, we're addressing that by introducing new offerings, particularly those targeting law firms and geographic expansion.
Good example, and as law firm analytics, which is designed to give law firms data insights to help them monitor the performance of the work they do for their largest insurance company clients.
Managing partners can access the deduction percentage by attorney to see a particular lawyers and unusually high deduction percentage.
Access to the data that they're most important clients used to evaluate them.
As real value to law firms and drives improvements and performance competitive position and economics.
It's also a fabulous way of extending the platform and it means that creates new revenue opportunities and growth as law firm analytics is a capability. We can offer directly to the thousands of law firms on our network.
Yeah.
We've also been investing and capabilities to allow for continued success and international expansion.
Particularly in the UK and Canada.
We're fortunate Tampa market leading platform.
And a well known and highly and we got a brand and these geographies.
Our banking customers face a broad range of competitors from challenger banks to fintech payments and financing providers.
Their challenge is customer attraction and retention.
They rely on us to provide the technology platform and digital transformation tools to deepen customer engagement grow wallet share and grow their business banking franchise.
It's a big ask and a big opportunity.
So it's no surprise, we're bringing a lot of new innovation and market for our digital banking customers.
Two significant business banks have signed on as beta customers for our new cash flow optimizer, our CFO and theyre targeting customers and their client base.
The early feedback it's been fabulous.
One bank said this is an absolute must have for us.
The second banks comments really went to the core of our mission and serving banks as a trusted innovation partner.
They said our clients can get accounts and services from any bank. This is what we need to have them stick with us.
Our customer engagement analytics is another way and we're deepening customer engagement for banks.
The platform collects data applies.
Applies AI and analytics and.
And delivers actionable insights that enable banks to achieve important objectives, such as increased conversion rates on new account openings per.
Predict and reduce attrition target next actions and measure customer engagement, which is particularly valuable and going through events like bank mergers.
The biggest market dynamic and the U K is easily open banking, which is created change and opportunity.
And early but high potential innovation driven by open banking is confirmation of pay.
The product detects fraud by matching and recipient's name and account details and the payment to the information maintained by the bank.
We have two banks on as early adopters and a strong pipeline.
A broader market trend across all of our markets is the convergence of AP and a R.
And that regard the acquisition of Treasury expressed during the quarter was strategically important event.
It's a good example of supplementing and accelerating our organic innovation agenda with a strategic technology acquisition.
While it's not particularly meaningful in terms of current revenues, adding less than half a million for the quarter. The strategic and significance is the proven cloud based treasury capabilities, which extend the offerings, we can provide to new and existing customers.
It also gives us an important element of our payments and cash lifecycle platform.
Bottomline is clearer and acknowledged leadership and business payments.
We also have a lot of receivables experience and are developing the next generation integrated receivables platform.
Combining these capabilities a pea and day are and now adding treasury gives us a single platform to address the full cash lifecycle industry analysts regularly speak about the convergence of Bay PNA are and we're well on on our way to having that capability and more and market.
From a competitive position offering a full platform strategy gives us a significant advantage over any point solution competitor.
The platform breadth provides an opportunity for existing customers to expand their relationship with bottomline and new customers to adopt elliott and element or the entire platform.
The product pipeline and innovations I've outlined are each strategically directed and addressing market dynamics and opportunities, adding more capabilities for customers extending our competitive advantage and expanding our tam driving growth and subscription revenue and lifetime customer value and continued success.
As for Bottomline and its shareholders.
So in conclusion, we're really pleased with the third quarter and our acceleration and subscription growth.
And a 400 million subscription run rate, we can easily see our next milestone 500 million and subscription revenue.
With an acceleration and subscription growth come in and Q4 and the strategic expansion of our product set and we're well positioned for the future.
Shareholders will be rewarded.
As we see strong subscription growth and the fourth quarter and next year.
So with that I'll turn it over to Bruce and then we'll both be available for questions.
Thank you Rob.
It's a pleasure to be speaking with you all today.
I'm going to talk about our performance in Q3, both financial and commercial.
And with a particular focus on the underlying drivers of our growing subscription revenue streams.
And then I'll provide guidance for the fourth quarter and the full year fiscal 'twenty, one as well as longer term into fiscal 'twenty two.
Q3 was a very good quarter for Bottomline.
Total revenue was $121 million, representing 8% growth over the prior year, both of those metrics being right on our target.
Most importantly subscription revenue in Q3 was $100 million, which is 14.2% growth year over year.
We were tracking very well to our goal of producing consistent 15% to 20% subscription revenue growth across the business.
Profitability was equally strong with $24 $1 million of EBITDA 15.8 million of operating income and 27 cents of earnings per share.
All in all we hit every key performance metrics, we set for ourselves.
Let's focus on subscription revenue for a few minutes.
In Q3 subscription revenues were 83% of our total revenue.
And are now on an annual run rate of $400 million.
And we achieved that performance despite currency headwinds in Q3 that were greater than we anticipated and transaction volumes from a few of our products that while recovering remain slightly lower than their pre COVID-19 levels.
Subscription revenue growth, excluding pay mode ex and legal spend management was 21% including.
And particular strength from our solutions in Europe.
And pay mode ex we saw substantial year on year growth from new payers, who were not live on our platform last year as well as solid growth from our existing customer base that demonstrates the strong customer lifetime value and high net retention rate of this solution.
Legal spend management revenue grew from add on business with some of our leading customers tempered by some continued lower transaction volumes from the base as a whole.
And our leading digital banking offerings continued to perform extremely well.
In addition to the strong revenue performance, we achieved some solid bookings wins with our sales and customer success teams this quarter.
Pay mode ex added 25, new payers across a variety of industry verticals, including health care higher education and property management.
Both through direct sales and also via our bank channel partners.
And we now have more than 450000 vendors on our network.
Eight new customers, including frontline insurance and embark general chose Bottomline legal spend management solutions.
And seven existing customers expanded their relationships.
And our digital banking solutions secured key wins with a 500 billion dollar National Bank selecting Bottomline is digital banking platform, a 10 billion dollar consumer credit reporting agency selecting our cloud enabler and encrypted and solutions and a 500 billion dollar national bank, extending our cyber fraud risk management.
<unk> solution to protect against insider and employee fraud.
Although overall, our bookings of $20 3 million were down a bit from last quarter. As you know, we commonly see variability from quarter to quarter.
Several large deals pushed into Q4, some of which have now closed.
And overall Q4 bookings are looking very strong.
By the way that bookings number includes new subscription revenue streams from customers that we convert from other revenue models typically legacy license and maintenance models.
Previously our reported bookings levels excluded those but when I saw that I propose that we include them because they are a real driver of increased subscription revenue growth for the future, which as you. All know is our primary objective.
Over the past few quarters the difference between those approaches with just a few hundred thousand dollars, so not material, but anyway I thought I'd call out this tweak to this metric.
Turning to the rest of the P&L as I mentioned earlier, we hit our Q3 EBITDA core operating income and core earnings per share targets.
Gross margin for the quarter was 60% up 2% from Q3 of 2020 powered by 62% gross margins from our subscription products.
We reinvested that added gross margin into our go to market and product development engines in order to continue to accelerate our growth.
Our cash flows and balance sheet remains strong.
We produced $37 million of operating cash flow and $28 million of free cash flow and the quarter.
As of March 31, we.
We had $138 million of cash and investments on hand.
Notably during the quarter, we closed our acquisition of Treasury Express for $31 million and we did not repurchase any shares in the quarter.
We expect a strong finish to the year and Q4, we expect subscription revenue of $102 million to $104 million, which equates to 16% to 19% growth over Q4 of 'twenty.
You'll note that this range is a little lower than the 18% to 20% expectation that was previously communicated for Q4.
Primarily because we now expect currency exchange rates to be a little less favorable in Q4 than we anticipated when we provided that guidance initially.
We expect total revenue in Q4 of $122 million to $124 million, so 10% to 12% total revenue growth.
EBITDA is expected to be $24 million to $25 million core operating income of $16 million to $17 million and core earnings per share of 25 to 27.
When we achieve those results we will hit our previously communicated targets for the full 2021 fiscal year across the board.
<unk> revenue growth.
Overall revenue growth EBITDA operating income and EPS.
Looking ahead to fiscal 'twenty, two we remain committed to our primary objective of delivering consistent 15% to 20% subscription revenue growth.
We've looked at the many variables that will impact where we end up in that range, including go live and ramp timing of our book solutions.
And the pace of volume increases and our transactional revenue streams.
Forward foreign currency exchange rates and many others.
We have taken what we believe to be conservative assumptions about all of those elements and we have high confidence and committing to 15%.
As the new fiscal year arrives and progresses.
We will revisit and refine our projected performance in the 15 to 20 per cent range.
Driven largely by this commitment we expect a minimum of 10% overall revenue growth in fiscal 'twenty two.
It has been a strong ambition of ours to drive through the impacts of revenue model transitions and bring the company to double digit growth, we expect to achieve that and Q4 of this year and to maintain 10% to 11% overall revenue growth through fiscal 'twenty two.
In terms of profitability, we are committed to a minimum of $106 million of EBITDA in fiscal 'twenty two.
We can drive the company to a higher level of profitability next year, if we chose to.
But there are critical investments that are the better choice to ensure our accelerated longer term growth.
For example, we suspended regular salary increases, but the onset of COVID-19 and as a result, our people have now forgone raises for the past two years, which is not sustainable in today's highly competitive market for technical and leadership talent.
In addition, we see an opportunity now to capitalize on the market opportunity in front of us by continuing to invest and new product creation and enhanced go to market capabilities.
Making these investments is the prudent and impactful course of action that still allows us to deliver $1 million to $2 million per quarter of EBITDA growth over fiscal 'twenty one levels.
So in summary for fiscal 'twenty, two we anticipate subscription revenue of 445 million or more and total revenue of $520 million or more.
We are proud to predict that in fiscal 'twenty to Bottomline will become a half billion dollar revenue company with double digit growth.
We will provide further updates of our guidance and our next earnings report, including details about operating income and core EPS.
I'm also happy to share with you that Angela White has just joined US as vice President of Investor Relations.
Angela is an experienced IR professional having led to function at endurance International group and Vistaprint Sim press.
Angela and I look forward to continuing to build on bottomline relationships with our investor community over the coming months and years.
When I joined Bottomline two months ago I saw a company that is uniquely positioned to capitalize on a huge market opportunity.
I saw a company with a very strategic position and the middle of a fintech market with enormous potential for long term growth.
My highest priority and ambition for Bottomline is that we continue to realize that potential accelerating topline growth, while balancing the need for investment profitability and cash generation.
Along the way, we'll continue to provide you with a clear strategic and financial plan and ensure that we execute against that plan and deliver against our commitments.
Our performance in Q3 represents strong achievement across all of those ambitions.
And as we look ahead to Q4 fiscal 'twenty two and beyond.
I'm increasingly confident that bottomline will deliver every bit of the bright future that we envision.
Now we will open the call for questions.
Thank you.
Ladies and gentlemen at this time, we will open up our call for question and answer session. If.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Andrew Schmidt with Citigroup. Please state your question.
Hey, Rob Hey, Bruce Thank you for taking my questions and again Bruce welcome.
Thanks, Andrew.
Two to start up and I'd like to ask sort of incoming.
Cfo's similar question just on sort of outlook philosophy could you talk a little bit.
And your philosophy on providing an outlook and communicate with the street you tend to set more prudent expectations is it.
And anything along those lines in terms of sort of your philosophy and in setting up debt foreign expectations would be helpful.
Sure. Thanks, Andrew Good question, well, I think I'm enough a bit of a fortunate position here in some respects because I have the benefit of joining a company that's got accelerating growth. So I can both.
And with Rob and provide you all with a very optimistic view of our ability to grow by at least 15% and fiscal 'twenty, two and also feel comfortable and providing that guidance.
As I mentioned and my comments, we looked at a lot of variables that go into that there are some of those that are more within our control and others and I think to answer your question Concisely I'd say I tried to take we tried to take conservative but reasonable assumptions. They are not it's not a lay up we did.
Want to put a lay up in front of us.
But it's but it is very very achievable my goal of course coming out of the chute here is is to perform at the expectations that we set up.
Got it it makes a lot of sense and then you mentioned I think 106 million and EBITDA as being the minimum for FY 'twenty two.
And we think about that 15% subscription growth. Similarly, that's sort of a baseline to sort of reference and then as you get more visibility potentially that could come up is that the right way to think about it that is exactly the right way to think about it we can deliver the 106 million of EBITDA at the 15% growth level, if we were able to get.
To 16, or 17 or more that will free up more and more gross margin obviously and.
We probably wouldn't logically reinvest all of that and real time over the course of the year. So yes, I think it would be logical to expect we might bring the EBITDA accordingly, but I don't want to get too far over our skis, but we want to watch those things happened before we before we adjust.
Yes, it makes a lot of sense, we're not even and in FY 'twenty two yet so it makes sense to start at that level. That's helpful. And then last one from me and I'll jump back in the queue. So it looks like last quarter products and it affected not impacted by transaction volumes grew 19%.
Acceleration at 21%.
Water.
And why shouldn't we expect once transactions volumes coming back circling back and legal spend and Piedmont ex <unk>.
And what are some of the factors to consider there.
Because it seems like Youre.
Youre, having pretty robust 19, and 21% revenue growth for this products that arent impacted and it seems like.
The transaction the transaction based businesses should accelerate as you get volume back other gating factors to that math and it seems like there should be faster growth just based on the sort of.
On the non transaction businesses and the transaction businesses and the subscription revenues.
I think Andrew the way to think about it is that once the transactional business and business normalizes.
And that we will kind of approach that 15% minimum level of overall growth across the various products.
There is some variability from product to product across the various subscription revenue.
And as offerings, but I don't think it's the case that when you get through the kind of post COVID-19 recovery of the transactional business is suddenly everything is automatically going to go to 20%.
It'll be it'll average out more we feel it'll average out more on the range that we indicated.
And you've got a mix of factors of course, and Roche, who know and you've said probably the most important thing. He said, we arent even in FY 'twenty two yet so we're looking ahead, but it's questions like timing of go lives.
At the time of a ramp.
Those are all factors that can drive.
Variability and the level of growth and the difference between the 15 and a higher number and we wouldnt have confidence or visibility to de to 100% commit to those.
Got it makes a lot of sense. Thanks, Rob Thanks, Chris I appreciate the comments.
Our next question comes from John Davis with Raymond James Please state your question.
Hey, good afternoon guys.
Rob maybe just to start on on bookings and you've noted that a couple of deals got pushed out of.
<unk> and the <unk> and some of those have already closed the wondering if you could size those and it's just as I look at the bookings on a year over year basis on totally understand it can be it can be lumpy, but I think now for.
And basically year to date.
On fiscal 'twenty, one we're below where we were so just trying to kind of solve for the bookings that you need to sustain that 15 to 20 per cent, let you talk.
Talk about and maybe you can just help us understand what what that could look like and for Q or at least what's closed to date.
Sure well first off so on when you mentioned deals pushed out way of US one single deal that kind of close the gap between.
Q2's bookings and what our.
Book and ship for Q3, so that that is and in fact, we have seen those some of those deals close in terms of the bookings we need to drive that growth. The fact that there are a number of factors that drive growth that don't go through bookings.
So how we're ramping I made some comments about vendor enrollment and how we're maximizing the revenue opportunity around <unk> ex.
That won't appear on bookings when our customers grow our revenues grow and legal spend and in <unk> ex so that won't go through bookings. So theres a couple of different ways that we and I'm on.
Last I'd mentioned this backlog, we have a lot of backlog both in terms of go lives and.
And in terms of vendors come on the network and legal spend opportunity to fully realize ramp. So we're not concerned about having the level of bookings for next year's revenue growth certainly can see that and have visibility to that 15% today and in fact that if you think about our model bookings that occur now.
Now are impacting the back half of next year at best So we have the bookings we need for next year's revenue growth No question and we've got a very solid pipeline and as I indicated during my remarks, we expect bookings and Q4 to be stronger than they were in Q3.
Okay, and historically you guys have talked about on it.
Trailing 12 month basis that bookings could you know if there are and the range of 25% to 30% of trailing 12 months.
Subs and trans revenue debt.
That was a good way to think about that and they changed their debt that's still kind of hold true.
And you could look at it that way but.
There are factors outside of the bookings number remember that the ramp so the more successful we are with vendor enrollment and ramp on <unk> ex for example can drive a lot of revenue that won't flow through the bookings number.
Okay, and then Bruce one for you and and I can appreciate that this.
This is your are your first call here, but it seems like the 22 guide is framed a little bit differently than it has in the past.
And the sense that you're saying this number.
At leisure or better.
And I think that's a little bit different than our past I want to make sure that I'm understanding that correctly.
And for all of the numbers that you gave that Theyre kind of this is the the minimal and based off of what we know and see today because like that and.
It's a little bit of a change and how it's been framed in the past.
Yes, I think you're right I think it is there would've been a range and the past and I it's deliberate.
I was.
And quite keen to put a number out there that I felt high high confidence we would make it.
It's not a guarantee I don't want to say it is but we.
We as we said a couple of times here, we've looked at a lot of factors and tried to say.
Even if everything doesn't quite fall the way we want it can we still hit this number and I think that's what the 15 and on the one O six represent and the 106 of course allows for.
And some some investment to drive that number higher that the reason the 106 is where it is is because we want to get the 15 to 16 to 17 to 18 over the course of fiscal 'twenty, two and going forward.
Okay, and then on that margin I think you commented on a couple of things and why I think it's implied to be down about 100 basis points year over year or thereabouts.
Where exactly are you investing that I assume you'd probably see some from a gross margin perspective is it fair to say that you still can see some operating leverage so that would be flat to up and and so all of this is kind of and the R&D and G&A lines and just talk specifically about about where you're investing.
And I think this will be.
Year, three with EBITDA right around the $100 million and just kind of want to better understand the investments being made to drive that and then the eventual operating leverage and can see.
Yeah sure. So if you just think about the difference between.
20% and 22% and 23% EBITDA.
And you all I think when I took looked at the average of what you're all view was up 22, you had said something like $118 million.
Of EBITDA.
So that's a difference of about 12 from what we put out.
And that 12 I can give you three big drivers right off the top the first is investment in customer facing functions sales marketing customer success and vendor enrollment if I just look at those areas and only the people that we want to bring on board to kind of turbocharged those functions.
And drive.
A better bookings better customer engagement better revenue for the future.
It's eight eight and $9 million right there difference between 'twenty, one and 'twenty two I mentioned and my comments are that we want and give our people salary increases for the first time and almost two years.
That's $7 million right there.
And then.
One other investment we made.
Last quarter when we.
Closed Treasury express was to broaden our product portfolio and Treasury management as we've said that's a really really important.
Net of functionality to add to our our offering and.
It's a two two and a half million dollars worth of.
On.
<unk> cost impact dilution in fiscal 'twenty two so when you put all those together you more than kind of explain that difference between the level you guys had in mind and what we what we communicated and we just think those are all the right things to do for the future of the business.
Okay and last one from me Robert you've talked a lot about shareholders will be handsomely rewarded.
On the powder I missed it did you guys buy any stock back in the quarter and then just remind us where you are on the authorization.
And I think given the M&A strategy, you kind of deploy to kind of go out and kind of.
Take small bites at the Apple and try and develop it internally because I think the right way to do things given valuation.
Tens, but healthy balance sheet, and maybe talk about your appetite for stock buybacks with the stock and the mid Forty's and just how you think about capital allocation, maybe new as well Bruce that'd be helpful. Thats. It from me thanks, guys.
Sure.
As Bruce indicated we did not buy shares this quarter. We spent 31 million on the Treasury special we did not buy with about 20 million authorized in our.
Buyback program today, and what's going to drive shareholder value is not.
Buy back so what's going to drive shareholder value as growth of the business you see comp companies and growth and certainly rewarded appropriately when we're adding customers today will retain those customers for a decade or more the lifetime customer value of those customers is extraordinary so we know and we're building value and when the business driving growth and will soon be.
At $500 million and subscription revenue, which is a major change from where we've been and wireless company and I'm hopeful and believe we'll get recognition for that.
Thank you.
Our next question comes from George Sutton with Craig Hallum. Please state your question.
Thank you Bruce welcome.
I did have a question on the vendor focus.
It sounds like you're going to be focusing more on the vendors. Historically of course, you had been working effectively for the corporations and I'm curious the thought behind that.
With respect to pay mode ex and was where are you getting any vendor.
PE push backs.
And is that behind the move thank you.
Sure well, it's first off it's not driven by vendor pushback, although I would tell you and a vendor pay model, whether that's virtual card Hh plus or whatever type there's always some level of pushback to been to.
The side of the transaction bearing the cost of the freight if you will so that that's always part of the model, but no it's not driven by that and and I shouldn't I wouldn't want to leave the impression that we're not focused on payers. We're of course focused on payers were driving new sales with payers and we have a.
Incredibly.
Competitive platform and that we believe the best platform for payers to pay the more value we can bring the vendors, though the more enrollment we have there.
The larger the automation opportunity for payers and the higher the rebate and the more revenue for Bottomline.
So vendors are looking at what does this get from me is it reconciling is helping me with reconciliation is it helping integrate into systems do I give visibility to payment can I handle multiple payment.
Types of am I able to get a stream from.
How many different payers, Japan me all of those types of things that we can provide a value to that vendor debt that make it the value proposition for both sides of the network.
Stronger so that's really what it's about and that's what it drives for bottomline competitive position and value to payers because theres more vendors on the network and more revenue.
Got you.
One other question relative to sales and marketing spend it's up relatively significantly year over year and.
It looks like Youre, clearly, putting some money to work.
Just wanted to understand can you give us some sense of where that increase is being spent is it being spent on.
A larger force to go to market or it was there something else there. Thanks.
First part I'd say on that is.
On digital marketing and a 70% of the buying process happens before human interaction.
And we have a phenomenal marketing team and when shall we continue to add and invest to that.
Less on the sales team is of course critical and important and that's what brings things across the finish line, but how are.
Customer engagement, how are new prospect engagement, how we're building pipeline and that's all driven by digital marketing quality of content. How we're tracking all of those things. We've also picked up and COVID-19 and doing events. They arent expense up, but we're making an investment and that so that we are gonna have digital events and we're continuing to use this and.
<unk>, which actually drove a change in behavior, rather than ask customers can you make a hotel and Tennessee, Dallas and Chicago for a conference.
We can now have an afternoon and evening event on.
All Webex and.
And remote so we're making an investment and those capabilities, yes, we're adding the sales teams and we're on.
And I shall add into partnerships, how we can.
Drive revenue opportunities through partnerships as a opportunity to bottomline does well through banks, but there are other channel. So those will be all the areas.
Probably and across the board answer, but starting with digital marketing.
Great. Thank you very much.
Yes.
Our next question comes from Gary pressed the piano with Barrington Research. Please state your question.
Yeah, Thanks, Hey, Bruce.
Robert.
You called out a couple of things here and the investments and all that.
In 2022.
And the guidance, but what is what are you, assuming correct FX and and really what kind of a drag was FX on the quarter first of all and then is there an assumption and therefore, what kind of drag FX is going to be for next year.
FX was a modest drag and the quarter I think one way you might think about it is we took our growth range down for Q4 by about a percentage point and we said.
And that the bulk of that was driven by FX. So I think that gives you an idea of what we experienced in both Q3 and what we're expecting to experience and Q4 the.
The numbers that we provided for fiscal 'twenty, two so far do not ponder theyre basically based on spot spot rate logic for for 'twenty. Two we did not bake in some assumption about.
Headwinds from nor tailwind from FX and 22.
And then can you tell us of your house.
The breakdown of your subscription revenue between actual SaaS and transactions.
And.
Thanks.
Well, so I'll step back and first I'd make a comment on that thanks.
Thanks tore.
Our 15 years, we saw our transaction based revenues continue to be a better way of better revenue model. That's the visa model and Mastercard model and switches, what we follow on <unk> X and legal spend management and we drive more revenue as well as our customers grow the onetime net was difficult.
Whats Duane and the economic disruption of COVID-19.
That's the only time, we've had debt revenue model will be to our disadvantage and I'm certain that what well I believe that there'll be some economic normality and it's going to return and as that does I'm certain that this is <unk>.
Actually a more attractive revenue model and transactions. So yes, it's hurt us and this past year.
But it's a better it's definitely the better model for us, it's probably about 40% round numbers.
Transaction based 60% is subscription.
It'll sound out Gary if I had my druthers I'd have on 100% transaction I think based on Mastercard do pretty well for themselves even though there are.
Times the transaction can work against you, but today the majority of our revenues are subscription a portion is and that transaction models.
Yes, I'm not trying to be critical I'm, just trying to understand the magnitude here and then in your guidance for next year again.
One when are you, assuming some kind of normalization and the transactional business the back half of the year.
I think Gary we expect we're seeing it right now so.
And when we think about normalization and we.
We are in both <unk> ex and legal spend which are the two businesses primarily impacted we're seeing them at this point back right about at or slightly above going into Q4 above the pre COVID-19 levels. So we think we're back where we were and kind of moving forward.
From there. We also are seeing the growth rates come back up now youre starting to hit some easier laps of course and those businesses, but.
But nevertheless, the growth rates are coming up and there arent just good fundamental dynamics and those businesses in terms of the amount of volume, we're seeing with our customer base.
And our and our commercial traction.
Okay. Thank you.
Our next question comes from <unk> Tandon with Needham <unk> Company. Please state your question.
Great. Thank you and good evening, let me also add my welcome to Bruce.
I wanted to Rob maybe ask you because you provided some nice metrics on the pay more and ex platform, which is very helpful are you able to share what is the dollar volume flowing through our rails today.
Maybe expectations around that and also and that same context.
How do you see yourself going against the other players out there and the market. Obviously is a very hot space and just wanted to get a better sense of the value proposition that youre able to offer versus your competition.
Sure.
We don't have any particular number on the transaction volume today out of it and then out over 200 billion runs through our network.
<unk> competitive position.
What my comments on my prepared remarks, it really address a good portion of that where we're driving additional value to vendors that makes them more compelling network. The other part that's really important and there was 450000 vendors on that network that means as we approach a pay are particularly in the verticals, where we have a strong presence.
Well one of the first things we will do is we'll get a bow, indicating all of their vendors and will have a direct match that can be 30, 40, perhaps even 50% of their vendors are already being paid on their network. So that means the process of ramping that the process to automation and process to rebate is that much easier and that much.
Faster for the payers, so scale and size matters quite a bit as you referenced to other networks I think over time, you're going to see more interoperability, Inc. And connection between networks. This isn't a winner takes all single market and <unk>.
I don't say that to suggest we're coming and anything other than first and the market, we focus on which is enterprise.
But I think that connectivity to other networks just provides more value. So.
And other network has we have 450000 vendors and another network is 200000, which 50000 to those and vendors.
And vendors are payers would like to pay I think youre going to see interoperability and the coming years that will make the automation promise become real.
Great. That's helpful color on and then maybe two quick ones for Bruce in terms of the margin compression.
And next year.
Evenly split between.
Cogs and Oh.
Well opex or is it going to be skewed towards.
One of them I, sorry, if I missed this.
And then I have a quick follow up around the trajectory around the seasonality anything we should expect that's abnormal in fiscal 'twenty two or is it pretty evenly split in terms of the trajectory of growth and margins over the course of the year. Thank you.
And Mike you broke up a little bit at the beginning of that I think you said something about when and where will we be investing between will you be investing more in and Cogs or in Opex could you just restate that quickly I want to make sure I got it right yes.
Yes, Bruce and I was just wondering the drag on margins and fiscal 'twenty two.
It's pretty evenly split between the two.
The segments or is it going to be skewed towards one or the other.
And towards Yeah. So I don't I don't think of it as necessarily being a drag on margins. I mean, we are still operating at about 20% EBITDA margin, which is what we did this past quarter.
And what we're looking at for Q4 as well so I think what we're what we're doing is largely.
Leveling at that at that 20% kind of EBITDA level.
As we drive revenue growth, we're creating incremental gross margin of course, so the dollars de facto are going back into opex and the kinds of areas that I was talking about earlier.
Okay.
And then you mentioned seasonality I'm sorry.
No no. We don't currently anticipate any any particular.
Notable aspect of seasonality for next year.
Great. Thank you so much.
Youre welcome.
Our next question comes from Bob Napoli with William Blair. Please state your question.
Thank you and welcome Bruce.
Well good and.
Good evening Robert.
Question on just on the 15% to 20% and the current trends and subscription and transaction which of your businesses.
Debt to perform above the average and and.
To be bigger drivers of that growth rate over the next couple of years not just next year.
Well certainly if you.
Look at the Tam opportunity and what we see going into next year <unk> ex.
It's a huge opportunity no question to be the way businesses pay and get paid and.
Every at every bit of our outlook for next year indicates we'll see.
Real strong results, though at the same time, our digital banking platforms banks are competing for customer engagement. How can we retain that customer how can I know more about that customer can I drive maximum wallet share and scooter markets come on so far beyond just how can I allow my customer to make and a C H and see balances.
And like and we're so well positioned for that with that so when and if every good position App and then last Europe, I'd mentioned and open banking, which is really interesting and changing the way.
Businesses pay and anytime this payment change.
That's good for Bottomline, because that means new platforms that means new capabilities. So we look across we don't see a drag on next year, we don't see a business area or a product set that's hurting us or holding us back we see.
Really almost unlimited opportunity around <unk> ex overtime.
Feel strong about.
Full product set.
Thank you and.
Yes.
And you've never I don't think given our net revenue retention rate any I mean, I think that would be.
Helpful to investors.
You could give and net revenue retention rate and if you.
Did it by segment digital banking pay mode.
Even just even those two and that would and.
And it's got to be over 100% I would believe if you're growing on the script shift subscription basis and transaction basis.
Yes, youre right. Its a very attractive number I agree that would be helpful. We looked at bringing that together and out the COVID-19 and transactions sort of disrupted that and in some places made debt.
First skews that number, but I think the comments well taken and that's something we'd certainly evaluate to be giving out and the future.
And then just on Treasury Express and.
And how that fits into a P. A R. The opposite the CFO the treasury market itself.
Obviously, a very large market.
Some significant players that are large and growing fast and that area.
But can you give some color on what you expect and revenue out of Treasury Express next year, but then.
Strategically how and how is the cross sell going to work how are you going on.
Build out that debt.
Business sure well, we don't have a revenue number for next year on Treasury Express it was less than $1 million and close in January and was less than $1 million and and I'm, sorry, less than half a million dollars and this quarter. So it's not a it's not entering the treasury market per se, it's really about the product capability and if you think about the states of <unk>.
On a P, which is sending my payments out a R, which is receiving payments and the middle state is treasury managing cash managing balance managing all of those investments and like so what we wanted to do to have a full payments and cash lifecycle platform is have that treasury.
Piece, you could sort of think of it is sitting in the middle if you will between our funds being received and a PE funds being sent out whats CFO does that's advanced analytics that we've developed.
And with machine learning and capabilities to help in cash flow and forecasting reconciliation and other aspects of cash and cash management and bringing all of that together silver full payments and cash lifecycle with treasure Express and then the data insights that CFO brings on top of that that's our platform.
<unk> and how we we wouldn't look at that we weren't entering the treasury market just as a treasury provider and we're really looking at us and broader platform than anybody else offers today, a full pad again, Paul a P day, our payments and cash lifecycle. So that's the strategic importance of it that's its relevance and.
And that's really why we are so excited about the combination.
Great. Thank you, Rob Thanks, Bruce and I appreciate it.
Thanks, Bob.
Our next question comes from Peter Heckmann with Davidson. Please state your question.
Hi, and welcome Bruce Thanks for taking my questions I just wanted to clarify.
And everybody has about what 35 per cent of revenue coming from outside of the U S and and the U S. Dollar has been weakening against those currencies. So.
It seems to be like debt.
FX was about a 250 basis point tailwind and through the quarter and at current spot rates. It looks like it's going to be about 250 to 300 basis point tailwind going forward. So.
If we exclude that tailwind and the acquisition are we.
Is your initial guidance for 2020, So you're really looking for about 12% organic constant currency growth and subs and trans.
No no I don't think so we've taken into account the currency effects for this year and.
And so I don't think the 15% converts to 12.
There may be there may be a 100 basis points I could look at that but but I don't think it's more than that when you think about the.
Effective currency over the entire year versus the entirety of next year.
Okay. Okay, I'll have to check that and then I didn't hear and did you get a backlog from the digital banking business.
We didn't but I'm happy to.
Backlog as of March 31 stood at $16 million and of that amount.
<unk>, 35% was expected to drop and across the the end of the year here just throughout this last quarter.
Okay, Okay, great and then.
That's really helpful. And then just lastly, maintenance, but did you give and operating cash flow number.
Yes, it's operating cash flow was $1 37.
Recollection.
Oh, you mean for I'm, sorry, you mean did you mean for the court and FERC did you mean for itself was.
It was $37 $37 million right, Okay got it alright. Thank you.
And actually one third zone okay.
Sorry, 37 million policies.
Thanks. Thank you thank.
Thank you we have reached the end of the question and answer session and that also concludes today's conference. Thank you everyone for your participation you may disconnect. Your lines at this time have a good day.